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Fate of tax extenders will be clear only after long wait

No hope for broad reform this year

As Congress goes back to work this week, broad tax reform appears to be dead, and the fate of tax extenders may not be resolved until late in the year.

It is shaping up to be another wait-and-see exercise on tax policy, which will once again make tax planning a challenge for investment advisers and their clients.

Just before going on its holiday recess, Congress reached a bipartisan agreement on a budget framework for the next two years that set spending levels and prevents a government shutdown. But the accord avoided tax reform.

“It tells us that they haven't found any common ground on the direction of tax policy for the next year, or they would have addressed it,” said Timothy Steffen, senior vice president and director of financial planning at Robert W. Baird & Co. Inc.

The budget agreement didn't contain a road map for broad tax reform nor did it deal with the 57 so-called tax extenders, or tax breaks that have been renewed periodically but expired as of Jan. 1.

The extenders, which range from one that allows tax-free distributions from individual retirement accounts for charitable donations to another that allows the deduction of state and local taxes on federal returns, likely will be in limbo for the rest of the year.

“The best hope for [2014] is an extenders bill, and that may not happen until after the election,” Mr. Steffen said.

Investment advisers are hunkering down for a long wait.

Craig Richards, managing director and director of tax services at Fiduciary Trust, said that the IRA deduction is popular with his clients.

“We live year-to-year with a lot of these things,” he said.

“Our suggestion is that if you have charitable interests, don't take the required distribution right away. Let's hold off on it,” Mr. Richards said.

In the past, Congress has waited until the beginning of the next year to approve extenders retroactively for the previous tax year. That scenario could play out again.

Many of the extenders, especially the IRA deduction, are likely to survive, according to Pamela Villarreal, a senior fellow at the National Center for Policy Analysis.

“It may have some good odds,” she said. “Seniors are a big voting bloc.”

Although the outlook for extenders is fairly bright, the light for overall tax reform is almost snuffed out.

Congress faced a monumental task in moving a big tax bill during an election year and the prospects further diminished when Senate Finance Committee Chairman Max Baucus, D-Mont., was tapped as the next U.S. ambassador to China.

Observers are still wary of lawmakers' potentially turning to retirement-savings tax deferrals as a way to raise revenue for spending or to pay for other parts of tax reform, as they did with Roth conversions during last year's fiscal cliff bill.

“That's what the industry is more concerned about rather than overall tax reform,” said Robert Kaplan, national retirement consultant at ING.